Jennifer Burson, Nolan Harvey
This literature review examines when and why pecuniary incentives backfire. Contrary to what classical microeconomic theory might suggest, paying someone more might make them less willing to work on a task, charging a small fine might increase an undesired behavior and increasing the size of a reward might cause one’s performance to deteriorate. In the last three decades, economists have made great progress in understanding incentives. However, much attention has been paid to a narrow and simplified view of human motivation while less research has aimed to understand why offering incentives can sometimes produce seemingly inconsistent outcomes. In this paper, we analyze relevant literature in behavioral economics and psychology as well as applications in various industries to understand under what circumstances monetary incentives can lead to diminished effort, motivation, or performance. We also aim to explain the underlying psychological phenomena that lead to these counterintuitive results.